SRV - The course is set, only missing a tailwind
SRV’s 2025 will still be driven by non-residential volumes while we expect that the residential pick-up will begin to reflect more in the numbers starting from 2026. Valuation is stretched on our estimates for 2024-2025 while the long-term potential remains high.
One of the leading construction companies in Finland
SRV develops and constructs residential and non-residential buildings with a focus on the Finnish growth centers. In 2023, SRV was the 6th largest construction company in Finland. The share of non-residential construction has increased for SRV due to the slower residential market during the recent years. In 2023, only 17% of the company’s revenue was related to residential construction. Although SRV's project portfolio is currently focused on lower-margin non-residential contracting, the company has improved its operative margins by enhancing project control and managing cost inflation. Operative operating profit was only slightly positive for FY 2023 while for FY 2024, SRV guides operative operating profit of EUR 7-12m.
Expecting slight pick-up in residential starts during 2025
SRV’s backlog was at near EUR 1.2b at the end of Q3/24, consisting almost entirely of non-residential contracting. SRV had no developer contracted units under construction. At the same time, it had 95 units completed and unsold. Typically, construction of a residential apartment building takes around one and half years to complete. Therefore, we estimate that the revenue from developer contracting in 2025E is solely driven by the sale of currently unsold units. Although we anticipate limited net sales from developer contracting, we project a slight increase in other residential sales next year driven by both contracting and development projects. Given that most of the current projects are lower risk contracting and co-development projects, the margin potential for 2025 remains modest. We now model net sales of EUR 780m and an operative EBIT of EUR 16.0m, resulting in a margin of 2.1% for 2025E.
HOLD with a TP of EUR 5.0
Our estimates for 2024E do not support the current pricing. For 2025E the valuation is neutral, yet the potential beyond 2025 remains high. Further evidence of the company’s turnaround and pick-up in the residential construction market are needed for us to put greater emphasis on the long-term potential. With only small adjustments to our estimates, we keep our TP and recommendation intact.